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Lessons from Rona/Lowe’s

In a vindication of the Rona board’s business judgment, on February 3, 2016, Lowe’s agreed to acquire Rona for $24 per share in cash – a 65% premium to Lowe’s July 2012 unsolicited $14.50 proposal that was rejected by Rona’s board, and a 104% premium to the pre-announcement share price.

Lowe’s original proposal did not proceed in part due to the Québec government’s concerns about the effect of the transaction on Rona’s stakeholders and the Québec economy more generally.

While board entrenchment and excessive governmental protectionism are to be avoided, there are many instances in which the board’s long-term business judgment in respect of value and other stakeholder interests, as well as the government’s legitimate concern about the economic impact of a transaction, turn out to be warranted. In this case, shareholders are receiving a much higher premium than they would have under the original proposal. Lowe’s has also made a number of important commitments, agreeing to continue to employ the vast majority of Rona’s current employees and to make Boucherville, Québec the headquarters of the combined businesses’ Canadian operations. The Caisse de dépôt et placement du Québec (Caisse), which holds approximately 17% of Rona’s shares, has announced its support for the transaction, and has noted that it “believes the transaction will result in equal or superior economic activity generated by the Rona banners in Québec.”

This transaction highlights a number of important policy issues and considerations that inform Canadian dealmaking in the current environment:

The critical role of the board in assessing what’s in the long-term best interests of the corporation and its stakeholders, and the fact that shareholders should carefully consider the views of a well-advised, independent and informed board. We note the success of Canadian Oil Sands’ board in convincing shareholders not to tender to the original Suncor hostile bid, paving the way for a higher-priced supported transaction in a very challenging market.

The importance of having a well-developed government- and stakeholder-relations plan when considering an acquisition of a strategically important Canadian business. The success of this transaction, as opposed to Lowe’s original proposal, will be based in no small part on the support of the board combined with the backing of the Government of Québec and the Caisse, which sends a strong signal that the undertakings Lowe’s has agreed to are of benefit to Québec and, by implication, of net benefit to Canada under the Investment Canada Act. We note the success of TPG’s acquisition of the Cirque du Soleil, which also had important commitments to Québec and Canada, as well as the stakeholder undertakings negotiated by the Tim Hortons board in agreeing to the Burger King acquisition.

The strength of the U.S. dollar relative to the Canadian dollar can drive dealmaking. While the 104% premium Lowe’s has agreed to pay for Rona is exceptional, from Lowe’s perspective it is a more modest increase, from approximately US$14 to US$17 per share, due to the decline in the Canadian dollar. Other U.S. and foreign acquirors may see additional buying opportunities in Canada in the current climate, particularly in the energy and mining sectors, where depressed commodity prices have adversely affected target valuations.

The regulation of defensive tactics and the question of how much time and latitude boards should have in defending against an unsolicited offer. The original proposal from Lowe’s informed, in part, the Autorité des marchés financiers (AMF) of Québec’s consultation paper on defensive tactics, which was intended to spark debate on the desirability of adopting a “Delaware-style” approach to the regulation of defensive tactics in Canada (discussed in this previous Osler Update ). Under the AMF proposal, securities regulators would effectively get out of the business of regulating defensive tactics (including rights plans), absent cases of abuse, and leave the regulation of defensive tactics to the courts. The success of the Rona board in this case is consistent with the views of those who support giving Canadian boards a greater ability to “just say no.” The pending changes to the Canadian takeover bid regime, which are intended to give boards of directors 120 days to respond to a hostile bid if adopted in their current form (discussed in this previous Osler Update), do not go as far as the AMF proposal, but signal a change in the regulatory environment designed to give boards more time to deal with an unsolicited offer.

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